I recently came across a very interesting article dealing with small business earnings and profits. The author claims that it’s hard to predict the initial profits of a small business, and therefore a small business owner would be better off setting income goals rather than profit goals.
The claim derives from the structural difference between small businesses as opposed to big ones. In a small business, accounting is usually run by the owner, rather than a specially appointed CEO; starting capita is usually low; and the financial management tools are usually nothing more than the owner’s computer.
Instead of looking at marginal profits, ROIs and tax optimization, small businesses must think of revenue optimization. It is a more controllable strategy, since projected income can be predicted more accurately than profits, which have many unknown variables. Small business strategy must be simple (but not simplistic) and consume as little time as possible, since small businesses should invest their time and efforts mainly in marketing.
The focal point of revenue optimization is the BEP (break-even point), which provides us with an indication of the amount of income we need to cover operational costs in a specific time frame. The formula itself is pretty simple: break-even point = fixed costs/ (unit selling price – variable costs). Of course all variable costs are gross. There are many online sites that will do the calculations for you, but it’s highly recommended to keep a monthly (or even weekly) BEP track in Excel. By calculating the BEP monthly, it’s easier to see if it’s even worth keeping the business open.
As for the revenue projections, I side with the worst-case scenario method. Instead of projecting the maximum income, try projecting a realistic one. How do you build a realistic projection? It’s best to use a gradual format, divided to the 4 quarters of an annual business cycle.
Q1: Revenues equal to the BEP, which means income = expenses. It’s an adaption period, so you don’t make money but—more importantly—you don’t lose any. It’s better to set aside reserve capita for that period.
Q2 & Q3: A gradual projections with revenues 100% higher than the BEP by the end of Q3.
Q4: A projection of revenues 150% higher than the BEP.
Now that you’ve set your projections, how do you achieve them? First, define the quantity and type of products and their price (i.e. quantity of product X, price Y, for customer Z). Second, formulate your annual marketing plan and define the activities needed to help achieve the revenue projections.
Running a small business is different than running a big business. It’s crucial that the business turn profitable within the first year. To do so, it might be better to focus on revenues rather than profits since it’s easier to predict and less time-consuming. By adapting the marketing and sales plans to the projections, small businesses get the tools needed to reach the revenue goals, which in turn will manifest as profits. Following these simple steps can help keep your business afloat during the first year and build the foundations to future success.